The Urban League of Metropolitan Seattle and several prominent political figures were among the vendors who received "questionable" payments from a Seattle Public Schools program that is the focus of a criminal investigation.

A probe by the state Auditor's Office into the program revealed $1.5 million for services with a "questionable public purpose" and $280,000 for services that were never provided. The audit has since led to an investigation by Seattle police and the King County Prosecutor's office under a secretive "inquiry judge" process in which witnesses and records can be subpoenaed, according to source in the prosecutor's office.

The investigation is focused on the district's now defunct Regional Small Business Development Program, which was created to encourage small locally-owned minority businesses to bid on school district projects. Small businesses with gross revenue under $1 million qualified for the program.

The program's manager, Silas Potter, resigned June 7 as the investigation was starting. Potter reported to Fred Stephens, the former director of facilities and construction, who resigned from the school district in July and has since been appointed as deputy assistant secretary for administration U.S. Department of Commerce.

The audit faulted Stephens for not adequately supervising the program and not establishing a system of internal controls to guard against waste or misuse. District program staff told auditors the "District did not receive much benefit from work provided by several vendors and that Potter "wanted support from prominent members of the community," according to the audit report.

Despite Potter's resignation, he created his own private company with the same name as the school district's program. He was briefly retained as a consultant for another two weeks. He hired a vendor to write grants for the private company and allegedly defrauded the City of Bellevue, which paid $39, 873 because city officials thought they were participating in district's small business program.

The audit began after district officials received a $35,000 check from Tacoma Public Schools that had been deposited into Potter's company's account. Potter gave the district a $35,000 cashiers check after the district filed a police report, according to the audit.

Names of people and organizations that were hired under the program to provide outreach, instruction, consulting services, marketing and lobbying were not listed in the report. But they were provided to seattlepi.com by the state Auditor's office. Among the names of those were hired as contractors under the program were the Urban League, a former state legislator, a former head of the state Democratic Party and a former Port of Seattle administrator.

In some cases, those hired as contractors were not aware that Potter wasn't authorized to contract with them, according to the report.

"We're not passing judgment on vendors," said Mindy Chambers, a spokeswoman for the state Auditor's Office. "These are places where the district didn't have systems in place to look at what people are being billed for. Whether people were correctly charging for their time or overcharging, will be up to the district to sort out."

Among some of the names and organizations:

The Urban League, a nonprofit that provides housing, employment and educational services to minorities and other disadvantaged people , was paid $25,000 for a software subscription fee for a database designed to match small business owners with general contractors. District employees said they never used the database and the vendor reported it was not functional, according to the auditor's report.

A consulting firm started by Elaine Ko, former director of social responsibility with the Port of Seattle, received $17,800 to meet with state legislators and conduct community outreach that turned out to be related to Potter's private company.

Potter also approved contracts to lobby state legislators when he had no authority to do so. Vendors who were hired included Ko, Charles Rolland, former head of the state Democratic Party and former member of Community and Parents for Public Schools of Seattle; Velma Veloria, former state legislator; and Eddie Rye, who, according to King County's website , is a business leader and community activist who prompted King County to change its logo from the crown to the image of Martin Luther King Jr. They were unaware that Potter had no authority to approve the contracts, according to the report.

Orange also billed $58,000 for outreach and recruitment work in 2009 and 2010 for the district's "Direct Hire and Apprenticeship" program that the Auditor's Office viewed as excessive given only 150 people were recruited, according to the report.

The district also paid Rolland at least $6,000 to create and maintain a database for the program that was "not functional" when the district received it. Rolland billed 120 hours to develop the database but it contained only a "list of student names and other identifying information," according to the audit report.

Among the contracts deemed as losses to the school district:

The district paid $163,000 to Grace of Mercy, a nonprofit. The school district paid for classes on dates when no classes were taught. "Class sign-in sheets and class evaluations provided by the District show this vendor attended classes as a student on dates the vendor billed for teaching. The program manager approved the invoices, certifying that services were rendered."

Another $78,000 was paid to Banner Cross, which is described as a nonprofit mentoring organization on its website, for instructional services between November 2006 and April 2007, and for "development", including lesson preparation, team meetings, and communications assistance between May 2007 and August 2007, according to the report.

But, district records "show the classroom reservations scheduled for that time period were canceled in January 2007," according to the audit report. Also, there were no class sign-in sheets for May through August 2007.

Banner Cross is registered to Dr. Leon "Skip" Rowland, according to the state Auditor's Office. Rowland also is under contract with the Greater Seattle Chamber of Commerce to serve as executive director of the Urban Enterprise Center, which handles outreach to small, culturally-diverse businesses.

"I am very angry that any school district employee would consider using this or any other program fraudulently and for their own personal gain. Such a use would be an abuse of taxpayer funds and an appalling violation of our community's trust," she said.

The school district's general council and school board president Steve Sundquist responded to the audit with a list of bullet points about how the district is trying to fix the problem. Among other steps, the board commissioned an investigation into how funds were mismanaged, appointed an ethics manager to oversee complaints and launched an anonymous hotline that lets district employees and others report fraud and misconduct.

The statement continued: "We agree that district management failed on several fronts, including lack of employee oversight, failure of internal controls, failure of the internal audit function, and lack of an adequate means for employees to raise their concerns."

The school board is expected Friday to receive a report from Seattle attorney Patricia Eakes, whom the district hired to review issues raised in the audit, Sundquist told seattlepi.com.

The report will be discussed Tuesday during a meeting in executive session and then dealt with publicly during next Wednesday's school board meeting, Sundquist said.

"We're all extremely outraged by it. The whole thing is unacceptable," he said. "We feel a strong commitment to the community to get to the bottom of it. We'll do whatever we need to do to restore public confidence."

The district is adding a member of the public to its audit committee, and legal counsel has been hired to recover losses from those at fault.

The criminal investigation into Seattle Public School finances should have no effect on a Seattle levy that would augment education funding, City Councilman Tim Burgess said Wednesday.

Burgess, the Council lead on the Families and Education levy, said there should be no link between the schools scandal and the separate ballot measure.

Earlier this month Mayor Mike McGinn announced the proposed $231 million, seven-year levy. If the City Council OKs the measure and it's approved by voters in November, the average household would pay about $134 a year in property taxes. This measure would replace one approved in 2004, a $117 million levy that cost the average household about $65 a year. Funding would be focused on the 23 Title 1 schools in Seattle. Those are schools that meet a federal requirement for additional funding because a high percentage of students come from poorer families. The levy would invest in programs for students from pre-school to high school, including continuing to provide pre-school space, at-home early learning skills, support for at-risk students, summer learning programs and expand school-based health centers.

"I think, from my perspective, it's full speed ahead on our process of evaluating the levy and taking a (Council) vote later in March," Burgess told seattlepi.com.

Burgess stressed that any monies spent from the levy would be awarded by and administered by the City, not the school district.

"Levy funds are spent only after performance-based contracts are awarded. And all levy funds are tied to very specific and measurable outcomes. And we take funds away when our outcomes are not being achieved."

Burgess added that he was pleased that the School Board has taken quick steps to address the questionable use of funds. "They moved very quickly last year to launch their internal investigation. They notified civil authorities in the King County Prosecutor's office. I just strongly affirm those moves."